Comments on: Roth IRA Account Explained

By: Javier

Javier — Tue, 18 May 2010 08:29:02 +0000

I’ve read a few articles about IRAs but this is the first article that helped me understand the difference between trad. and roth. Thanks!

By: Ryan

Ryan — Sun, 20 Sep 2009 12:21:27 +0000

One factor I have only heard mentioned once is that the tax you save today in a traditional IRA is at your marginal tax rate (ie, the highest tax percentage you would pay on any of your income) while the tax you save on a Roth would be at a various brackets (ie the first x dollars withdrawn would be taxed 10%, the next x dollars at 15% etc…). So in effect even if you are in the 25% bracket now and at retirement only in the traditional will you be actually seeing the tax benefit on that 25%.

By: Dan

Dan — Sun, 06 Sep 2009 17:43:04 +0000

“Tax rates could go down.”

LMAO.

By: Jeff Rose

Jeff Rose — Fri, 04 Sep 2009 21:27:08 +0000

Haha! It’s so funny you say that because Jim and I were just discussing that. I’ve had numerous discussions with folks that just don’t get.

Recently, a guy asked me what our Roth IRA rates are. I tried to explain the difference and he just responded with, “Well, I know my banks is paying 2% so what’s yours paying?” I tried to explain again to no avail. Here’s a quick story on it…..

http://www.goodfinancialcents.com/best-roth-ira-rates/

By: Patrick

Patrick — Fri, 04 Sep 2009 16:27:04 +0000

Roth IRAs are great. I always get asked that same question, where to put the money. It seems to be a common misconception with IRAs that you have to put it into a particular organization or a bank.

By: eric

eric — Thu, 03 Sep 2009 06:40:28 +0000

I love the Roth IRA…they better not mess with it!

By: Kosmo @ The Casual Observer

Kosmo @ The Casual Observer — Wed, 02 Sep 2009 20:28:08 +0000

I definitely agree with you on #1. Overlooked benefit.

I have a Roth 401K option at work (as of 1/1/09)

By: Scott Lovingood

Scott Lovingood — Wed, 02 Sep 2009 19:24:49 +0000

I would add a couple of things.

1) ROTH IRA as emergency fund – Since you have already paid taxes on your contributions, you can withdraw your principal without penalty or taxes on it. You have to wait a certain number of years on roll overs but it makes a great way to combine an emergency fund with retirement savings.

2) Roth 401ks now exist which allow you to place more money into them that traditional IRAs so ask your employer about them.

3) The best way to balance the known and unknown issue – use both a Roth and Trad 401k. That way you are prepared for whatever happens and can save more for your retirement. You can also use a trad and Roth IRA but won’t get the benefit of higher savings amount.

By: freeby50

freeby50 — Wed, 02 Sep 2009 16:59:56 +0000

Matthew, the assumption is that with a traditional IRA you’d be putting away more than the $5000 of after tax money. You’d put an equivalent pre-tax amount into the traditional IRA.

Say you make $50k a year and the tax rate is 20%. You could put $6250 into a traditional IRA or you could pay $1250 in taxes and put $5000 into a Roth IRA. So with the traditional IRA you put more in the account to begin with since you got it tax free.

By: Matthew

Matthew — Wed, 02 Sep 2009 16:50:33 +0000

You make a good point. I’m still not entirely convinced that it’s a wash though, especially if you invest the money in a taxable account. The extra money you’ll have to invest in that account from using a traditional IRA will be subject to the drag of taxes for all those years so it seems like you will end up with a lot less if your gains are significant (which I would assume they will be over 30 or more years) relative to the Roth IRA. I’ll have to sit down and look at a specific example when I have more time.

By: Kosmo @ The Casual Observer

Kosmo @ The Casual Observer — Wed, 02 Sep 2009 16:15:04 +0000

Imagine the panic if we did shift to taxing consumption and didn’t do something to account for Roths.

I doubt that would happen, either.

By: centsandthecity

centsandthecity — Wed, 02 Sep 2009 15:43:44 +0000

Great post! I’m so happy I FINALLY set up my Roth IRA last week.

By: Kosmo @ The Casual Observer

Kosmo @ The Casual Observer — Wed, 02 Sep 2009 15:41:17 +0000

Yes, I touch on these issues in my article.

While tax rates do go up (and sometimes down), the breakpoints are also adjusted for inflation. So a higher income 50 years from now might not necessarily be taxed at a higher rate – because it might be a bracket or two below where it is currently

By: AJ

AJ — Wed, 02 Sep 2009 15:31:38 +0000

Great post. I am about to get one with fidelity.

By: JC

JC — Wed, 02 Sep 2009 15:29:49 +0000

perhaps looking at the account in isolation you are correct (eg. $5000 that grows tax-free and $5000 that grows only to get taxed, the former is obviously going to have more), but we do not live with IRAs in isolation. If you go the Trad IRA route, you have extra money in the now and present that you can use (or invest in taxable account) because it did not go to the taxman. in the end, all else being equal, it is a wash.